Please help I am taking a final right now Assume a 65000 inv

Please help I am taking a final right now:

Assume a $65,000 investment and the following cash flows for two alternatives. YearInvestment X $20,000 10,000 15,000 40,000 25,000 Investment Y $25,000 20,000 25,000 4 a. Calculate the payback for investment X and Y. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Investment X yea Investment Y year b. Which alternative would you select under the payback method? Investment X Investment Y

Solution

a)

Investment X:

Cumulative cash flow for year 0 = -65,000

Cumulative cash flow for year 1 = -65,000 + 20,000 = -45,000

Cumulative cash flow for year 2 = -45,000 + 10,000 = -35,000

Cumulative cash flow for year 3 = -35,000 + 15,000 = -20,000

Cumulative cash flow for year 4 = -20,000 + 40,000 = 20,000

20,000 / 40,000 = 0.5

Payback period for investment X = 3 + 0.5 = 3.5 years

Investment Y:

Cumulative cash flow for year 0 = -65,000

Cumulative cash flow for year 1 = -65,000 + 25,000 = -40,000

Cumulative cash flow for year 2 = -40,000 + 20,000 = -20,000

Cumulative cash flow for year 3 = -20,000 + 25,000 = 5,000

20,000 / 25,000 = 0.8

Payback period for investment Y = 2 + 0.8 = 2.8 years

b)

Investment Y since it has a llower payback period.